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The study examined the impact of taxation on economic growth in the Nigeria for the period of 40 years (1974 – 2014). The focus of the research was to determine the cause and effect of taxation on economic growth in the Nigeria. The methodology adopted  for the study was ordinary least square (OLS) involving the student’s T-test, to test  the significance  of the individual parameter estimate, the F-test, to test the significance of the entire regression plane, the R2 and Adjusted R2, to test the joint influence of the explanatory variables on the dependent variable. Finally, Durbin-Watson’s statistics (DW) was used to check the presence or absence of serial correlation on the data. The study observed that taxation on economic growth in the Nigeria has a positive and significant relationship on gross domestic product of the economy. Thus, this study recommends that urgent attention should be intensified by the government toward improving the tax revenue collection especially the non-oil tax revenue of the economy in order to enhance the blockage of all loopholes in over tax laws as well as bringing more prospective tax payers into the tax net and formulate fiscal policy that will monitor the channelling of public funds to avoid waste of resources as observed from this research work. This would protect the economy from further negative trends of taxation in the economy.











Nigeria as a nation has the vision of becoming one among the world’s 20 largest economies in the year 2020; this obviously is the brain behind the priority attention the present administration is directing at eradication of corrupt practices and infrastructural development which is essential for economic growth. A developed economy is one with the ingredient to stimulate investment and create wealth, this by implication offers an atmosphere that is business friendly and has the potential for the actualization of the vision of the nation. The desired outcome requires a lot of money to put the economy in a position that stimulatesinvestment, therefore, tax policies need to attract potential investors, and the revenue from tax should be sufficient enough to meet the infrastructural expenditures of the government (Apere, 2003). The political, economical and social development of any country depends on the amount of revenue generated for the provision of infrastructure for that given country. However, one means of generating the amount of revenue for providing the needed infrastructure is through a well structured tax system. Azubuike (2009) is of the view that tax is a major player in every society of the world.

Apex (2003) notes that taxation is a macroeconomic and fiscal policy instrument; it involves the transfer of resources from the private to the public sector for the accomplishment of economic and social goals. The tax system is an opportunity for government to collect additional revenue needed in discharging its pressing obligations. A tax system offers itself as one of the most effective means of mobilizing a nations internal resources and if  lends itself to a an environment conducive to the promotion of economic growth. Nzotta (2007) on the other hand, argues that taxes constitute key sources of revenue to the federation account shared by the federal, state and local governments.

According to Appiah et. al., (2004) tax is a compulsory levy imposed on a subject or upon his property by the government to provide security, social amenities and create conditions for the economic well being of the society. On the other hand, Tosun and Abizadeh (2005) acknowledge that taxes are used as proxy for fiscal policy. They outlined five possible mechanisms by which taxes can affect economic growth. First, taxes can inhibit investment rate through such taxes as corporate and personal income, capital gain taxes. Second, taxes can slow down growth in labour supply by disposing labour leisure choice in favour of leisure. Third, tax policy can affect on research and development expenditure. Fourth, taxes can lead to a flow of resources to other sectors that may have lower productivity. Finally, high taxes on labour supply can distort the efficient of human capital, high tax burdens even though they have high social productivity.

Taxation is intended to raise the necessary funds for public expenditure, to redistribute income, to stabilize the economy, to overcome externalities, to influence the allocation of resources, while at the same time should be supportive to the economic growth. The purpose of the efficiently designed taxation is to achieve desired fiscal policy objectives in the most efficient way, namely by limiting undesired distortions, minimizing the cost of tax collection and promoting economic growth (Desislara and Nikolay, 2012). The whole essence of taxation is to generate revenue to advance the welfare of the people of a nation with focus on promoting economic growth of a country through the provision of basic amenities for improved public services via proper administrative tax system and structure. The role of tax revenue in promoting economic growth and activity may not be felt if poorly administered. This calls for a need for proper examination of the relationship between revenue generated from taxed and the economy to enable proper policy formulation strategy towards its efficiency.

A country’s tax system is a major determinant of other macroeconomic indicators, specifically, for both developed and developing economies; there exists a relationship between tax structure and the level of economic growth. Indeed, it has been argued that the level of economic growth has a very strong impact on a country’s tax base (Kiabel, 2009; and Vincent, 2001) and tax policy objectives vary with the stages of development.

However, the serious decline in price of oil has led to a decrease in the funds available for distribution to the federal and state government. The need for state and local government to generate adequate revenue from internal sources has therefore become a matter of extreme urgency and importance. Aguolu (2004) states that though taxation may not be the most important source of revenue to the government in terms of the magnitude of revenue derivable from taxation, however, taxation is the most important source of revenue to the government, from the point of view of certainty, and consistency of  taxation. Aguolu (2004) further mentioned that taxation is the most important source of revenue for the government. Owing to the inherent power of the government to impose taxes, the government is assured at all times of its tax revenue no matter the circumstance. Azubike (2009) opined that government use tax proceeds to render their traditional functions, such as the provision of public goods, maintenance of law and order, defense against external aggressions, regulation of trade, and business to ensure social and economic maintenance. Musgrave and Musgrave (2004) also stated that the economic effect of tax include micro effects on the distribution of income and efficiency of resources use as well as macro effect on the level of capacity output, employment, prices and growth. However, the use of tax as an instrument of fiscal policy cannot be achieved because of dwindling level of revenue generated as a result of ineffectiveness of government officials. Kiabel and Nwokah (2009), argues that the increasing cost of running government coupled with the dwindling revenue has left all tiers of government in Nigeria with formulating strategies to improve the revenue base. Therefore, this research study, describes, identifies and analyzes the potential impact of taxation on economic growth of Nigeria.


There is a general lack of consensus among scholars on the contribution of tax revenue to economic growth of nations. For instance, Festus and Samuel (2007) established that the role of tax revenue in promoting economic activities and growth is not felt in Nigeria. Whereas Tosun and Abizadeh (2005) in their study of economic growth of tax changes in OECD countries from 1980 to 1999 reveal that economic growth measured by GDP per capita has a significant effect on the tax mix f GDP per capita. The two studies are showing contradictory results on the effect of tax revenue on economic growth. The emergence of oil as a major tax revenue is one of the means a country’s government devises in solving the economic problem of the country and to enhance government expenditure which is expected to be beneficial to the citizens of such country through the provision of social and economic infrastructures (Adereti et al., 2011). In Nigeria, this has not been the case because despite the tax revenue and expenditure reported year in year out by the government, the physical state of the nation in terms of infrastructure and social amenities is backward. Therefore, this study seeks to examine the influence of tax revenue on the economic growth of Nigeria.

Over the years, revenue derived from taxes has been very low and no physical development actually took place, hence the impact on investment in capital goods is not being felt. Inadequate tax personnel, fraudulent activities of tax collectors and lack of understanding of the importance to pay tax by tax payers also constitute some of the problems in raising tax revenue to enhance capital investment. This study will also investigate to what extent has taxation contributed to capital investment in Nigeria and this economic growth. This problem could be an expansionary one directed at reducing the rate of national unemployment; government through tax incentives can stimulate investment as the tax liability on investors is reduced and more money becomes available for investment purposes.

The primary purpose of taxation is to generate revenue for the government to settle its expenditures and for the provision of social amenities and welfare for the populace. According to Ogbonna (2012), this reasoning justifies the imposition of taxes for financing state activities and for the provision of a basis for apportioning the tax burden between members of the society. Today, Nigeria is indeed in dire need of effective and efficient tax system in order to generate revenue that will stimulate economic growth (Ojo, 2000). in essence the study will seek to find out to what extent has taxation influence economic growth in Nigeria.


Broadly, this study seeks to identify the extent to which taxation has brought about economic growth in Nigeria. The specific objectives are as follows:

  1. To investigate the effect of personal income tax and companies income tax on economic growth in Nigeria.
  2. To examine the contribution of VAT to gross domestic product in Nigeria.
  3. To what extent has taxation influenced economic growth in Nigeria?








The following hypotheses were designed for the study:

H01: personal income tax and companies income tax has no significant effect on the economic growth of Nigeria.

H02: VAT has no significant influence on gross domestic product in Nigeria.


Those who design state and local fiscal policy have had a sustained interest in the role that taxation plays in the economic growth of states, regions, cities, and special districts or zones. Most studies of employment growth, investment growth or firm location include an analysis of tax. The significance of taxation to the economy cannot be overemphasized.

This study is of benefit to state and local policy makers as they have an unenviable task of deciphering firm’s complaints and deciding whether additional tax incentives and lower taxes represent economic rents or constitute a timely and necessary response to keep firms in place.

This study will also assist the government and the policy makers at national level as they design policies aimed at enhancing economic growth and achieve equity income and wealth distribution through a better revenue system. It will also help to broaden the nation’s revenue base thereby making it less dependent on oil export.


The scope of this study covers the impact of taxation on the Nigerian economic growth over a period of 40 years (1974 – 2014). The trend of company income tax (CIT), personal income tax (PIT) and value added tax (VAT) are examined for the period to determine their effect on the Nigerian economy which will be proxied as gross domestic product (GDP).


The major shortcoming encountered while undertaking the study was the difficulty in accessing the data for analysis and the constraint of time and funds.


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